Accumulating Wealth
(Please note this is not tax advice, we recommend you speak to your accountant for this)
The tax changes impacting the buy-to-let mortgage market are HUGH and they are certainly going to take their toll on landlords, many of them will see their profitability plummet I guarantee this.
As a result, of these tax changes many Landlords are turning to limited company arrangements to avoid being hit with additional tax, but could this be an option for you, and how can you go about it?
We will take a closer look at how to set up a BTL limited company better known as a Special Purpose Vehicle (SPV) and explain just how easy it is …………………..
Why Incorporate a SPV ?
The changes for Landlords began to be phased in at the start of 2017/18 tax year, and by 2020, landlords will have to pay tax on their full rental income, without deducting the cost of their BTL mortgage interest, and will instead receive a tax credit equal to 20% of their interest cost.
This will bound to influence Landlords, and some will see their tax band increase to the higher income tax band …… Ouch ……………… – there goes the profitability!
The tax reforms apply to landlords who pay tax on an individual basis, rather than those operating through a company – which means landlords who are structured as the latter are exempt and won’t face any tax hikes.
The benefits of a SPV:
- Paying corporation tax on a limited company (which will be 18% by 2020) could be more beneficial than paying income tax on the property without the tax relief
- Protection of funds and assets
- Personal mortgage deposits can be withdrawn from the limited company by a directors loan (no tax liability)
Setting up your SPV
You can simply do this online or you may want to go through a solicitor or accountant.
SPVs can be set up as trusts, partnerships, or more commonly as a limited company.
It will take a few minutes to fill out the company registration, and you can have the company incorporated within 3 working hours. You need a minimum of one director and one shareholder.
You must use ALL 4 of the following SIC codes (relating to letting property)
- 68100 – Buying & sell own real estate
- 68201 – Renting & operating of housing association real estate
- 68209 – Other letting & operating of own or leased real estate
- 68320 – Management of real estate on a fee or contract basis
You will need to enter the above SIC codes in the designated SIC Code page of your company registration on Companies House:
Property and tax implications
If you’re already a BTL investor, you’ll face additional tax implications when transferring property into a company.
Essentially, you’ll need to “sell” your properties to your newly-formed company, and if the purchase price has risen, you’ll be liable to pay capital gains tax on it (unless you can show that the property is a “business” rather than an “investment”).
Then, when “buying” the property through your company, you’ll have to pay the extra 3% stamp duty surcharge for additional/BTL properties.
Bear all this in mind as it might be better to keep your current portfolio in your own name
But certainly if you’re thinking of building a NEW portfolio an SPV may be the most tax efficient way.
Find the right BTL mortgage for limited companies
Once you’ve gone through the process of incorporating, you’ll also find that your mortgage options change.
You’ll need to find an even more specialist product as not all BTL mortgages are available to limited companies, but happily, a growing number will accommodate – our data shows that the number of BTL mortgages available to limited companies has more than doubled in the last
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